Can landlords be subject to National Insurance on their rental income?

As part of Rachel Reeves's Autumn Budget, the Treasury is reportedly considering raising landlord taxes in an effort to increase revenue

The most recent rumors suggest that the Treasury may target landlords in the Autumn Budget by reducing rental income to National Insurance.

According to The Times, officials are looking into plans to increase buy-to-let landlord taxes in an effort to raise £2 billion for chancellor Rachel Reeves' next budget.

The conjecture comes after other reports of possible increases in property taxes, indicating that the Treasury is closely considering property tax reforms as a means of achieving fiscal balance.

On the sale of homes valued at over 500,000, Reeves is thinking of substituting a national property tax for stamp duty, according to The Guardian.

A capital gains tax charge on properties that sell for more than 1.05 million is another measure the chancellor is reportedly considering as part of a mansion tax for homes.

The government is reportedly considering imposing National Insurance on landlords, according to the most recent rumor, in an effort to stay within the "red lines" that Reeves established prior to the general election, which prohibit the imposition of income tax, VAT, and National Insurance.

Savings, pensions, and real estate earnings are mostly exempt from the 8% national insurance tax that is applied to employee wages.

Reeves' allies told The Times that since increasing the rate would not be required, expanding the scope of National Insurance to include rental income would not violate any red lines. They compared it to adding VAT to the cost of private education.

How would the policy actually operate?

Eight percent of employee contributions (six percent for self-employed individuals) go toward national insurance, which drops to two percent for income and profits over £50,270.

The latest official data indicates that net property income in 2022 - 2023 was 27 billion. Therefore, the Treasury would have received roughly £216 billion from an additional 8% property income tax.

Smaller landlords will be more negatively impacted if the same National Insurance rates are applied to rental income because they drop to 2% on higher incomes.

If forced to pay National Insurance, thousands of landlords could face an additional 1,057 bill annually, as the Times reports that the most common property income bracket is between £50,000 and £70,000.

"Will encourage more landlords to sell, but unlikely to lose government votes."

According to experts, this move will affect both landlords and tenants, even though it may not be all that unpopular given the extreme criticism the government has received for changes to the inheritance tax and the Winter Fuel Payment.

According to Tom Bill, head of residential research for Knight Frank in the UK, "targeting landlords won't cost the government many votes, but such actions always end up hurting tenants."

Another disincentive would further reduce supply and drive up rents, as landlords are already selling out ahead of the Renters Rights Bill and stricter green regulations. In other ways, those who remain might pass on the additional expenses. Governments must realize that taxing an activity reduces its output.

An extra tax burden "risks accelerating the exodus of landlords from the market," according to Shaun Moore, a tax and financial planning specialist at the wealth manager Quilter.

Moore stated that the inclusion of National Insurance "would almost certainly be passed on to renters through higher rents" for landlords who still rent out properties.

Additionally, he says, "As landlords seek to lessen the effects of these changes, we would anticipate that the increasingly common practice of holding properties within a limited company structure would soar."

Ironically, this might indicate that the government's projected revenue increase is much less than expected.

The director of the real estate firm Benham and Reeves, Marc von Grundherr, claims that the rumored policy "smacks of political point-scoring rather than sound housing policy."

"Applying National Insurance to rental income threatens to undermine rental supply by squeezing small and medium-sized landlords, who may pull up stakes or restructure," he says.

How does the Treasury responds?

Regarding rumors of potential changes to tax laws, the government remains silent. This means that in the lead-up to fiscal events like the Budget, there are frequently rumors that never come to pass and are never made public.

When BFIA contacted the Treasury for comment, the department did not address the rumors that National Insurance would be applied to rental income, instead stating: "As outlined in the Plan for Change, our focus is on growing the economy, which is the best way to strengthen public finances. As demonstrated by our planning reforms, which are anticipated to increase economic growth by 6 points and reduce borrowing by 3 points, there are other options besides changing tax and spending policies.

"We are dedicated to minimizing taxes for working people, which is why we safeguarded working people's paystubs in the previous autumn's budget and upheld our pledge to avoid raising the basic, higher, or additional rates of VAT, employee national insurance, or income tax.